Modigliani & Miller





Kerry Back

How much debt should a company have?

  • There is a wide range of debt levels.
    • Public companies relatively low.
    • Private equity/leveraged buyout funds relatively high.
  • What are the pluses and minuses?

Hold investments and operations constant

  • Consider a financial restructuring with no effect on investments or operations.
  • Issue equity to pay down debt or borrow money to repurchase shares.
  • Anything that increases enterprise value is good for shareholders.
    • Suppose EV = 300, debt=100, equity=200
    • Suppose we can borrow 20 more to repurchase shares and increase EV to 310
      • Now debt = 120
      • Equity = 190
      • Shareholders get 20 in share repurchases, so 210 total.